Justin Trudeau is carefully walking back his pledge to balance the federal government’s books before the next election. It’s a wise move politically.
It is also the right thing to do.
The prime minister chose to signal his decision to backtrack in an interview with the Montreal daily La Presse published Thursday.
“If we look at the growth projections over the next three to four years, it will be difficult (to eliminate the deficit),” he reportedly said.
In a later news conference, he declined to elaborate on that comment, saying only that, as a result of low oil prices, the economy was facing “real challenges.”
But the message was clear. This particular Liberal campaign promise, to put Ottawa’s books in balance by 2019, is no longer operative.
Trudeau will be hammered by the Conservative opposition for this. In last year’s election campaign, the Liberal leader said he planned to run $10 billion annual deficits in the short run, but would return the government’s books to balance by the end of his four-year term.
After election day, those promises began to quickly unravel.
First, Finance Minister Bill Morneau acknowledged that his annual deficits might exceed $10 billion. Now Trudeau has effectively scrapped the entire balanced-budget promise.
Politically, it was probably smart to get this out of the way quickly. If the Liberals are going to break a major campaign pledge, it is arguably better that they do so now rather than wait until just before the next election.
In terms of rational economic policy, removing the arbitrary 2019 deadline is even smarter.
Not that there is anything wrong, in principle, with balancing budgets. Everything else being equal, budget balancing is a good idea. It forces government to exercise some discipline over spending. It signals to voters that if they want extra services they should be prepared to pay higher taxes.
But these days, everything else is not equal. The world economy is weak. Japan is struggling, as are parts of Europe. The Chinese economy is slowing.
So-called miracle economies like that of Brazil are no longer quite so miraculous. Nor has the much anticipated U.S. recovery lived up to expectations.
The decision by central banks to slash interest rates to near (or in some cases below) zero boosted the stock market for a while. But it has not helped the real economy much. Companies are happy to use cheap money to buy one another. In a time of uncertainty, they are less keen on expanding job-creating productive capacity.
For countries such as Canada that rely on natural resources, falling commodity prices have added an extra burden.
In this context, it makes no sense to set an arbitrary deadline for balancing the budget. Ontario’s Liberal government made that mistake. Now, in an effort to keep her ill-advised promise to eliminate Ontario’s deficit by 2018, Premier Kathleen Wynne is selling off Hydro One, the province’s crucial — and lucrative — electricity transmission monopoly.
The arithmetic behind government financing is pitiless. Budgets can be balanced only by cutting spending, raising taxes or selling crown assets. In some contexts, any or all of these might make sense. This is not one such context.
It does not make sense to raise taxes or cut spending because the economy is already weak. Indeed, when the economy is weak, it makes most sense to increase government spending.
The Trudeau government’s promised $60-billion infrastructure program will not, on its own, solve Canada’s growth problems. But it will help.
As for federal Crown assets, few are left to sell. Ottawa could try to privatize Via Rail and Canada Post. But unless both Crown corporations were allowed to cut services even more, who would want to buy them?
The government’s overall approach to the economy will become clearer when Morneau releases his first budget, probably next month. Who knows what it will contain? The Liberals have a habit of disappointing.
But so far, the signs are good. Trudeau defied political orthodoxy when he campaigned on a promise to run deficits if necessary. The prime minister’s comments last week suggest this wasn’t just a political stunt.
It seems he’s serious.